Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means that
A)your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall.
B)your firm will be able to charge more in dollar terms while keeping peso prices stable.
C)your domestic competitors will enjoy a period of facing little price competition from Mexican imports.
D)both b and c are correct

Question

Quizplus · Accepted Answer

A significant depreciation of the Mexican peso implies that the peso price of American imports will increase, making it harder for U.S.-based companies to sell their products in Mexico. As a result, their products can be priced out of the Mexican market, putting the U.S. company at a competitive disadvantage. Option B and C are not correct because a weaker peso would reduce the purchasing power of Mexican buyers, and hence, they would be less willing to spend their money on American imports. Therefore, the company cannot charge more in dollar terms, nor will domestic competitors enjoy a period of less price competition from Mexican imports.

Suppose Mexico Is a Major Export Market for Your U